Contract Law

Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.

AIR 1966 SC 543

Facts

Bhagwandas Goverdhandas Kedia carried on business in Ahmedabad.
Girdharilal Parshottamdas & Co. carried on business in Khamgaon.
The parties negotiated a contract for the supply of cottonseed cake through a long-distance telephone conversation.
One party made the offer from Ahmedabad, and the other communicated acceptance from Khamgaon.
A dispute subsequently arose regarding performance of the contract.
Proceedings were instituted in Ahmedabad.
The question was whether the Ahmedabad court had territorial jurisdiction.
This depended on where the contract was concluded:
at Khamgaon, where acceptance was spoken; or
at Ahmedabad, where acceptance was heard by the offeror.

When and where is a contract formed where acceptance is communicated by telephone?
Whether the postal rule applies to telephone communication.

Under the Indian Contract Act, acceptance must ordinarily be communicated to the proposer.
For instantaneous communication such as telephone, acceptance is complete when it is heard or received by the proposer.
The postal rule is confined to non-instantaneous communication and does not ordinarily apply to telephone conversations.
A contract made by telephone is concluded at the place where the acceptance is received.

The Supreme Court treated a telephone conversation as substantially similar to communication between persons present in the same room.
When parties speak face-to-face, acceptance is ineffective unless the offeror hears it.
The same principle applies over the telephone.
If the telephone line breaks before the acceptance is heard, no contract is formed merely because the offeree spoke the words.
The offeree must ensure that the acceptance is communicated.
The Court examined Sections 3 and 4 of the Indian Contract Act.
Section 4 contains special rules concerning completion of communication.
However, those rules had to be interpreted in light of the nature of the communication used.
Applying the postal rule mechanically to telephone communication would create an artificial result.
Telephone communication permits the parties to know almost immediately whether the message has been received.
Therefore, the contract should be formed where the offeror actually receives the acceptance.
In the present case, the acceptance spoken from Khamgaon was heard in Ahmedabad.
Ahmedabad was therefore the place where communication of acceptance was completed against the proposer.
The Ahmedabad court consequently had territorial jurisdiction.
The majority followed the reasoning in Entores.
Justice Hidayatullah dissented and placed greater emphasis on the literal language of Section 4, but the majority view became the governing rule.

The Supreme Court held that a contract made by telephone is concluded at the place where the acceptance is heard by the offeror.
Since the acceptance was received in Ahmedabad, part of the cause of action arose there.
The Ahmedabad court had jurisdiction.
Use this case for: telephone acceptance is complete on receipt, and the contract is formed where the offeror hears the acceptance.